Government officials now expect 401(k) plan sponsors to conduct periodic due diligence reviews.  With respect to their 401k or other retirement plans, the problem is that most sponsors (owners) do not have the in house resources to do so.

 

This is not something that 401(k) plans historically did.  On the heels of the recent mutual fund scandals, though, Labor Department officials indicated that sponsors had a duty to periodically investigate plans and benchmark funds and fees.

    

Baby boomers are now retiring, and their 401(k) accounts often are their primary source of retirement income.  A sponsor potentially could be liable for less than stellar 401(k) account growth if employees can claim that he did not meet his fiduciary duties.

    

Trusting the reputation of a major mutual fund company is not enough anymore.  Sponsors must investigate and compare their plans to other programs at least every two to five years, as well as demonstrate that their plan expenses are in line with what others are paying. Blind trust is not prudent.  You need a process, and you need to document that process. 

    

Every fiduciary decision has to be made through a careful process.  According to ERISA, the primary plan fiduciary is the sponsor, i.e., the employer.

   

Therefore, it is the employer’s responsibility to ensure the prudent selection and oversight of plan vendors.

   

Sponsors must monitor vendors in two ways:  micromonitoring, which should occur

annually, examines plan features and services, while macromonitoring every three years or so allows s

ponsors to benchmark with competitors.

  

Smaller employers who comparatively lack resources and manpower find it difficult to monitor vendors to this extent.  Thus, owing to ERISA provisions that compel bewildered sponsors to take on experts to help with due diligence, most small to mid sized plans will need to hire consultants.

    

There is potential liability if due diligence reviews are not conducted.  Failure to engage in a prudent process may breach fiduciary duties, which may render the sponsor liable for damages.  For example, if plan participants pay fees that are higher than the current market rate because the sponsor did not perform a review, that fiduciary could be liable for the higher fees.

    

But as long as the sponsor can prove he did a proper investigation, he can potentially shield himself from liability.  The employer has to show that he engaged in a prudent process and that he made a reasonable decision based on that process.  This applies to all retirement plans, not only 401(k) plans.

    

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies.  He speaks at more than seventy conventions a year and writes for over fifty national publications.  For more information and additional articles on these subjects, call 516-938-5007/935-7346.  The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity.  You should contact an appropriate professional for any such advice.